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How can Keppel Corporation Limited Continue to Profit? – Part II

Welcome to the second part of the article on Keppel Corporation Limited  (SGX: BN4). In my previous article, I covered the sources of revenue for Keppel Corp. In here, we look at the company’s profit and balance sheet.

A closer look at profits

From our previous article, we have observed that Keppel Corp’s revenue basically flat-lined between 2009 and 2013. Today, we shall take a look at the profits from various segments to see if the top-line trickles down to the bottom-line. Furthermore, we will look at the operating cash-flows and capital expenditures to see if the company has been able to generate free cash flow.

Keppel - 2

Source: Company Earnings Report

From a segment-profit point of view, it becomes obvious that the Offshore and Marine business unit is the stable profit maker for Keppel Corp. This comes despite the fluctuation in the revenue base for the Offshore and Marine business unit over the past five years. Keppel Corp’s Property arm has also been a major profit contributor in the past two years, dishing out 45% of profits made in 2013 (Keppel Corp’s financial year aligns with the calendar year).

On the other hand, profits from the Infrastructure business have been rather lackluster despite the unit making up 28% of Keppel Corp’s 2013’s revenue.

Keppel - 4

Source: Company Earnings Report

The view for operating cash flow and capital expenditures is not promising. Capital expenditure for Keppel has been steady over the past four years. But, operating cash flow has been more volatile, falling below capital expenditure most of the time. This meant that Keppel Corp only managed to produce positive free cash flow in only one out of the past five years between 2009 and 2013.

Keppel - 5

Source: Company Earnings Report

The negative free cash flow generated means that Keppel Corp has been piling on debt. Borrowings have grown significantly , going from $1.7 billion in 2009 to over $7 billion in 2013. Thankfully, Keppel Corp’s cash and equivalents have also grown (albeit at a slower pace) from $2.9 billion in 2009 to $5.6 billion in 2013. It should also be noted– that the company has adequate annual income to cover its interest expenses.

Foolish summary

Keppel Corp’s Offshore and Marine segment has been a source of reliable profits in the past five years. However, as global oil prices tumble, some investors may start to question how reliable these profits are, moving forward.

The segment’s net order book remains relatively healthy at $12.7 billion as of 30 September 2014, and the company boasts 30 proprietary products in drill-ships and the like. In fact, my fellow colleague Ser Jing feels that it could be one of the stronger oil and gas companies worth looking into. Individual investors might not know where oil prices will be in the next few years, so if there are concerns around it then seeking a higher margin of safety could do the trick.

As of its closing price on 1 December 2014 at $8.56, Keppel Corp traded at a trailing earnings ratio of about 8.4, and has a trailing twelve months dividend yield of around 4.9%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.